CPA Canada has issued Five Steps to Simplifying Financial Statements – Today, written by Alex Fisher and me…

…(but if you’ve had enough of me from this blog, just forget those last two words and proceed on the assumption Alex wrote the whole thing!).

The publication “sets out a principled five-step approach to simplifying financial statements by reducing disclosure overload and streamlining disclosure while achieving both more effective communication and full compliance with the intent of disclosure requirements.” These are the steps:

Disclosure overload is, of course, the issue of the day, as embodied in particular by the IASB’s ongoing disclosure initiative, and by the recent IAS 1 amendments I addressed here. The CPA Canada document certainly isn’t the only resource available on this – the big firms have all issued publications covering the same basic territory I believe, notwithstanding the possible irony of remaking themselves as experts on how to remove the excess that they’ve done as much as anyone to create in the first place. Still, the basic merit of the new wave can’t be denied: there’s little doubt that much of the information commonly contained in financial statements merely adds volume, without doing anything significant to help readers.

It’s perhaps less clear whether to remove that information would always yield a measurable benefit. Many of us like to cite Mark Twain’s comment about writing a long letter because he didn’t have time to write a short one, the point being that concision and precision often demand an extra investment of time and effort. But that doesn’t mean the reader would necessarily get more out of the short letter. If you’re a major procrastinator, you can ignore two pages just as easily as ten. If all the communications you received were shorter, you might just spend more time playing video games. And the two pages might not strike everyone as a painstakingly crafted jewel. You might like the ramshackle digressions of the longer version, sensing it provides a truer sense of the writer’s real mood. You might think the two page version merely seemed like a careful evasion from someone with something to hide.

Versions of these complexities and others apply to the disclosure overload issue. Some aspects of it seem to me relatively straightforward. If you want to know how a particular entity accounts for income taxes under IFRS for instance, you can get the information in any number of places online. If you’re not capable of doing that, and you actually need the entity itself to provide a summary of its accounting policy, then you won’t be capable of engaging productively with the information anyway. This and similar examples suggest we should move to a more fluid relationship between what’s in the financial statements themselves and what’s made available elsewhere, and the IAS 1 amendments have taken a step in that direction. But of course, the issues aren’t all as easy to assess as that one.

Anyway, the CPA Canada document focuses on steps that “can be taken now by management, with reference to the standards and requirements currently in place. They provide an opportunity to add immediate value to an entity’s financial statements, without requiring significant investments of money, time or resources.” Again, many of these steps are in line with the IASB’s recent clarifications – for example, why not provide all the information on a particular item in the same part of the financial statements, rather than distributing it between several different pages? (As I wrote here, the IFRS Foundation’s own financial statements provide a nice reference point for implementing this and similar matters). But I think readers may find that the document provides a useful way of setting them out.

For instance, it ends by providing twenty questions for preparers to ask themselves about simplifying financial statements, which I think should help most entities pull together a plan. But it’s only realistic that one of the questions is this: “In our efforts to simplify our financial statements, have we addressed areas where disclosure should be increased?” To take just one example, it’s not unusual to plow through a set of notes without actually being able to tell (from the financial statements themselves at least) what the company actually does! Or for another, a lot of technical disclosures about embedded derivatives and the like would go down easier with even a brief explanation of why the entity actually entered into such an instrument. This information may be in the MD&A, but then there’s another fragmentation issue for you…

Simplifying financial statements, of course, doesn’t mean they end up actually being simple. If anything about assessing an entity’s financial condition and performance was easy, then there’d probably be little money to be made from investing in them. To a great extent, we should be considering how to embrace the complexity, not how to run from it. But that implies it’s a productive complexity, not one based merely on hollow compliance and inertia…

The opinions expressed are solely those of the author